JOHANNESBURG — There’s no doubt that Viceroy’s report on Capitec last week has been met with strong rebuttals from senior figures in South Africa’s financial sector. Among those who have been most vocal around the saga is the team from Benguela Global Fund Managers. And in this letter, Benguela’s Chief Investment Officer Zwelakhe Mnguni outlines just some of the key lessons learned during this very interesting debacle. – Gareth van Zyl

By Zwelakhe Mnguni*

Dear Alec

This is a personal message from Benguela to thank you for the truthful manner in which you reported on our Capitec engagement. As such we appreciate your coverage which set the record straight. Thank you very much.

There is no doubt that we’ve learnt valuable lessons on sharing our communication with clients. While we will continue to report to clients on our corporate engagement as per mandate requirements, a major change is that we would no longer share the actual communications with clients.

Capitec came back with a comprehensive response which we believe confirmed some of our concerns but also helped clarify others like when origination fees are charged – the response was published on Sens on Thursday, 01 Feb 2017.

In particular we are comfortable that the true level of client delinquencies has been disclosed to be R17 billion on a R45 billion book i.e. ±38% (which is in line with peers) versus the 12.2% reported in 2017. We had assumed only R3.9 billion in client delinquencies as reported excluding write-offs or fully rehabilitated ones.

It is now up to those who are invested in the stock to further analyse the contents of the Capitec statement and arrive at their own conclusions. Also, we encourage investors to pay close attention to the upcoming reckless lending case brought by Summit Financial Partners scheduled from 12 – 16 March 2018 in the Stellenbosch Magistrate Court. Losing that case could lead to some material financial consequences. Capitec confirmed that they are defending the case as they believe that they complied with the laws.

Capitec demonstrated an exemplary commitment to address all our concerns despite this engagement being clouded by a very irresponsible Viceroy approach. As you know, upon becoming aware of the Viceroy statement, we sent out a statement to all our clients dismissing Viceroy’s allegations on Capitec’s solvency and liquidity. Indeed, we have yet to come across anything that suggests that Capitec’s liquidity and solvency is at risk.

For us, the job is done! It is far better for us that Capitec management, clients and existing shareholders come out the real winners out of this engagement. There was a very real risk of creating a bank deposit run on wrong Viceroy premises and we would have been caught up in that maelstrom. So tactically, we are glad that we are out of this for now. However we will closely monitor Capitec’s progress and disclosure in future.

From our perspective ESG issues are not negotiable and need to be tackled head on by fund managers. It is no longer good enough to only know what a stock is worth, we also need to know what damage a business could do to society and the possible cost of a social backlash.

We hope that the firm but comprehensive approach we took on this particular engagement will give some comfort that we take our fiduciary duties around clients capital very seriously. To protect our clients capital, we will continue to engage firmly and comprehensively with all companies we are invested in and those who are big enough to matter for our portfolios.